How can startups manoeuvre the current funding slowdown?

India saw an unprecedented surge in VC investments over the last few years with 2021 leading the record-breaking funding rounds. However, the ongoing Russia-Ukraine war, interest rate hikes and recession fears led to a funding crunch as investors turned cautious on spending. 

Indian startups raised a total of $18 billion in the first half of this calendar year. Even though the amount raised is higher than the corresponding period last year, there is a clear slowdown on a quarter-on-quarter basis. In the second quarter of 2022, VC investments in startups stood at $6.9 billion, down nearly 60% from $11 billion in the first quarter, according to data from Venture Intelligence.

The mega deals --- investments over $100 million --- were also down on both year-on-year and sequential basis. Interestingly, even as late and growth-stage startup funding dried up, early-stage funding proved to be resilient. 

Early stage startups raised $856 million in the first quarter of this year, while second-quarter funding stood firm at $839 million. When it came to the late-stage startup funding rounds, the second quarter funding nearly halved to just $1.7 billion, compared with $3.3 billion in the first quarter of 2022.

With capital flow expected to be muted in the many more months to come, Indian startups have tightened their belts and resorted to layoffs. According to the Inc42 layoff tracker, over 11,000 employees were fired in the first six months of this year. 

Even as ed-tech firms faced the heat for the sheer scale and number of layoffs, several unicorn startups like Ola, Blinkit, Vedantu, Cars24 were part of the firing list as well.

Able Joseph, founder & CEO, Aisle, says startups should first spend on manpower than on marketing. Marketing expenses should produce results, cannot spend indiscriminately, he says adding that there has been overhiring for absolutely no reason. Don’t see the need for software startups to hire hundreds from top-tier colleges. 

Rashmi Daga, founder & CEO, FreshMenu, says companies should stick to their core business. They should work towards fulfilling business milestones. Firms will reduce vanity marketing spends. 

Meanwhile, VC funds and tech investors are urging startups to focus on durable growth and profitability. Sequoia Capital recently made a presentation to its portfolio companies stressing on generating sustainable cash flows, consistent growth and disciplined financial management. 

Another investment firm Y Combinator had also sent advisory notes to the founders of its portfolio firms on how to navigate through the current crisis.

Able Joseph, founder and CEO of dating apps maker Aisle which was recently acquired by InfoEdge, says founders should particularly focus on employee morale as startups downsize their workforce and freeze hiring plans. 

Nevertheless, startups will have to turn conscious about their marketing spends and hiring practices and learn to live with greater scrutiny going forward. Will the need for being circumspect take the sheen off India’s startup story or only enhance it going forward?